2012 (11) TMI 165 - AT - Income Tax

Tribunal rules on SAP charges, upholds TPO's decision on fees, stresses separate benchmarking

The tribunal partly allowed the assessee's appeal, directing the deletion of the addition related to SAP implementation charges while upholding the TPO's ... Transfer pricing adjustment - Rejection of TNMM approach - assessee carried the dispute before DRP - Held that:- TPO has determined the ALP at 'nil' keeping in view the factual position as to whether in a comparable case, similar payments would have been made or not in terms of the agreements. This is a case where the assessee has not determined the ALP. The burden is initially on the assessee to determine the ALP. Thus, the argument of the assessee that the TPO has exceeded his jurisdiction by disallowing certain expenditure, is against the facts. The TPO has not disallowed any expenditure. Only the ALP was determined. It was the Assessing Officer who computed the income by adopting the ALP decided by the TPO at 'nil'. TNMM v/s CUP approach - Held that:- The appellant in the present case also did not demonstrate as to how the transaction by transaction approach in his case is not possible. It has also not been shown as to whether there has been any real or tangible benefit by carrying such international transactions with the AEs. The comparable uncontrolled price method ('CUP' method), for the subject transactions being most direct method for determining arm's length price and chosen as most appropriate method in this case by TPO, therefore, cannot be faulted with. We, therefore, do not find any error in rejecting the TNMM method applied by the assessee and determination of ALP by applying CUP method for Benchmarking international transactions in a case like this. The DRP also cannot be said to have erred in approving the CUP method adopted by the TPO for Benchmarking international transactions with the AE. Professional Consultancy & Management fee for support services - Held that:- The impugned transactions are found to be distinguishable and separate international transactions, carried by the assessee with its Associate Enterprise. Each and every transaction was required to be bench marked separately. The appellant did not compute net profit margin realized from each such transaction nor laid any material on record to show that the available data of comparable transactions, if any, is unreliable or inadequate. These transactions are also not shown to be closely linked with each other. In fact in India no guidance is provided regarding criteria for choosing a particular method and the law also does not provide for priority of any particular method to be applied - Rule 10D(1) of the I.T. Rules, 1962 also mandates the maintainability of record of uncontrolled transactions to be taken into account in analyzing the comparability of the international functions entered into by the assessee. It, therefore, is obligatory on part of the appellant to maintain such record and produce the same before the TPO to show that it has bench marked the international transaction at ALP. This obligation, however, has not been discharged by the assessee. SAP license and MS office - Held that:- DRP reached a finding that these two have been purchased at a lower rate and has gone to benefit the assessee requiring assessee to be allowed benefit on that account, but it was neither proper nor justified to uphold the conclusion of the TPO for making addition in his income on that account. Since the onus that lay upon the appellant that the international transaction has been Benchmarked at ALP in respect of payment for SAP stands discharged and that also is found to have passed the benefit test, the addition so made, therefore, is unjust and uncalled for. Accordingly, assessing authority is directed to delete the addition on that account and allow the ground raised in appeal by the assessee accordingly - appeal partly in favour of assessee. Issues Involved:1. Not providing sufficient opportunity.2. Assessing the total income.3. Segregation of closely linked transactions.4. Selection of method.5. Scope of transfer pricing adjustment.6. SAP Implementation charges.7. Benefit of +-5%.Issue-wise Detailed Analysis:1. Not providing sufficient opportunity:The assessee argued that the AO erred in not providing sufficient opportunity, violating the principles of natural justice. However, this ground was not pressed during the hearing and was dismissed as not pressed.2. Assessing the total income:The AO assessed the total income at Rs. 62,565,161/- against the assessee's computation of Rs. 17,161,832/-. The DRP upheld the AO's assessment, finding flaws in the assessee's TP study and supporting the AO's adjustments.3. Segregation of closely linked transactions:The TPO rejected the TNMM method used by the assessee, which aggregated closely linked transactions. The TPO instead applied the CUP method, determining the ALP of certain international transactions (management fee, professional fee, SAP implementation fee) as NIL. The DRP concurred with the TPO, noting that the services provided were generic and did not justify separate payments.4. Selection of method:The assessee contended that the TPO erred in rejecting the TNMM method and adopting the CUP method without providing comparable uncontrolled transactions. The tribunal upheld the TPO's decision, stating that the CUP method was the most direct method for determining ALP and that the TNMM method was not appropriate for the impugned transactions.5. Scope of transfer pricing adjustment:The assessee argued that the TPO misinterpreted and ignored information provided to substantiate the receipt of services and benefits. The tribunal found that the TPO and DRP had considered the evidence and concluded that the services were either not beneficial or were generic, thus justifying the NIL ALP determination.6. SAP Implementation charges:The TPO determined the ALP of SAP implementation transactions as NIL, ignoring the factual details provided by the assessee. The DRP initially found that the SAP license and MS Office were purchased at a lower rate, benefiting the assessee, but ultimately upheld the TPO's NIL ALP determination. The tribunal directed the AO to delete the addition related to SAP implementation charges, as the benefit test was met.7. Benefit of +-5%:The assessee argued for the benefit of +-5% under the proviso to Section 92C for computing the ALP. This ground was not specifically addressed in the tribunal's order, implying that it was not a significant factor in the final decision.Conclusion:The tribunal partly allowed the assessee's appeal, directing the deletion of the addition related to SAP implementation charges while upholding the TPO's NIL ALP determination for management and professional fees. The tribunal emphasized the need for separate benchmarking of each transaction and supported the use of the CUP method over the TNMM method for the impugned transactions.